Iraq’s oil quandary awaits a solution

After years of negotiation, a deal between Turkey and Iraq’s autonomous Kurdish region, which is said to be close, opens cracks, not only in the edifice of the Iraqi state, but also its relations with Opec.

As Tolstoy said, the two most powerful warriors are patience and time. After years of negotiation, a deal between Turkey and Iraq's autonomous Kurdish region – now close to signature, according to Iraq Oil Report – opens cracks, not only in the edifice of the Iraqi state, but also its relations with Opec.

There have been numerous false dawns over the Zagros Mountains. Oil companies have repeatedly been assured that an accord on exports would be concluded soon. Short-lived agreements with Baghdad have come and gone. But now, with the Kurdish president Masoud Barzani's meeting with the Turkish prime minister Recep Tayyip Erdogan in Turkey's largely Kurdish south-east, patience and time appear to have proven stronger than Kurdish Peshmerga fighters, Turkish nationalists or hectoring Baghdad politicians.

The broad outline of a Turkey-Kurdish deal has gradually emerged over more than a year of official comments, leaks and rumours. The Kurdistan Regional Government (KRG) would export oil, optimistically up to 1 million barrels per day (bpd), and gas to Turkey. Some proceeds would be used to pay companies operating in the Kurdish region, while the rest would be held in escrow pending a revenue-sharing law between Baghdad and Erbil. And a Turkish state company would take shares in a number of exploration blocks.

The device of an escrow account in a Turkish bank would seem a remarkable intrusion on Iraqi sovereignty, with Baghdad already calling the Kurdish region’s contracts with international oil companies illegal. The central government could counter by holding back the KRG’s approximately 11 per cent share of the national budget, which provides most of its income. Then would the Turks, or the KRG itself, decide whether its own oil sales would make up the losses?

Further uncertainty comes from continuing fighting in Syria, the new-found autonomy of the Syrian Kurds in the oil-producing north-east, who are aligned neither with Mr Erdogan nor Mr Barzani, and Turkish domestic politics. The planned Iraqi parliamentary elections next April may throw up a new governing coalition in Baghdad or replace the prime minister Nouri Al Maliki. The Kurds may emerge as kingmakers, with a revenue-sharing deal part of the price for their support – preferable to the region becoming entirely dependent on Turkey.

Kurdish oil – with grand themes of geopolitics, nationalism, fierce wars of words and swashbuckling entrepreneurs – has attracted more media attention than the big companies’ steady, unglamorous work around Basra. But with far greater oil resources, and the prospect of producing 6 million to 7 million bpd by 2020, it is southern Iraq that really matters for global oil markets.

The stand-off over the Kurdish region’s oil does not directly affect developments in the south. But other regions in Iraq, including Basra, have become increasingly impatient to see some of the same kind of development that their oil money has created in the KRG.

And an independent KRG oil policy opens up a crack in the country’s Opec policy. Already with a shrinking pie and the prospect of a return of Iranian crude, Iraq’s large production build-up poses a question for Saudi Arabia and its Gulf allies: How should they engage with Baghdad, when would it accept a production quota and at what level?

Now that issue could become much more complicated. A million bpd of Kurdish oil would have some impact on Opec itself, with the group’s overall ceiling at 30 million bpd. But needing to pay oil companies and probably its own bills, the KRG would be unlikely to accept a share of a national quota. Federal Iraq would be loath to cut back production to accommodate Kurdish exports it terms illegal. Amid the rumours, there seems no answer to a simple question: how can one country maintain two conflicting oil policies?

Robin Mills is Manaar Energy's head of consulting and the author of The Myth of the Oil Crisis